However, after that, Sherwin stopped playing seriously (although he still played occasionally) and instead became one of America's top corporate lawyers.
By the mid-1980s, Sherwin was a Vice-Chairman of GAF Corp., a billion dollar company. Although Sherwin never held the title of president or Chairman of the Board, it was widely known that Sherwin was actually the man running the company. GAF was Sherwin's company.
In this capacity, Sherwin made a deal with Boyd Jefferies, a well known securities market maker in Los Angeles, to maintain a market in GAF stock. Sherwin told Jefferies that if Jefferies lost money trading the stock, Sherwin would reimburse him.
Jefferies later told Sherwin that he had lost $40,000 trading GAF stock and asked Sherwin to reimburse him.
Sherwin directed his assistant to cut the check. The check was prepared but, after thinking about this some more, Sherwin decided that the payment was improper and did not mail the check to Jefferies.
Jefferies was angry at having been stiffed for $40,000. Money was not the issue for Sherwin. GAF Corp. had billions of dollars. A mere forty thousand dollars was peanuts. Sherwin was merely trying to do the legally correct thing.
Later, Jefferies was implicated in a wide variety of illegal stock dealings, none of which had anything to do with Sherwin or GAF Corp. In cases like his, the Department of Justice often makes a deal with the mastermind of a criminal scheme. It agrees to let the mastermind go free and not to prosecute him, provided the mastermind informs on all the little guys who helped him in his scheme.
Thus, the US made a deal with Jefferies. Jefferies would not have to go to jail, provided that he would become a "professional witness" and testify against others. They asked Jefferies to tell them about anybody that he might be able to testify against.
Because Jefferies was still mad at not being paid the $40,000 by Sherwin years before, he decided to testify against Sherwin. Sherwin was arrested. Because of being the top executive of one of American's largest corporations, this arrest made the front page of the New York Times and all of the financial publications.
One of the most persistent questions which was asked of me at that time, because I was then thought of an expert in federal securities laws, was: What was it that Sherwin did that was illegal?
After due deliberation, I concluded that what Sherwin did was illegal. There is a New York Stock Exchange rule which prohibits a broker from guaranteeing a customer against loss. Breaking this rule is one of the most serious violations of the New York Stock Exchange. It is also one of the most frequently violated rules. Any time a broker says, "If you lose money in this stock, I will make it up to you," he violates that rule. Yet, brokers often say that.
The recent financial collapse in Japan has been caused because they apparently do not have that rule in Japan. All of the major Japanese brokerage firms have been guaranteeing their biggest customers to buy back their stocks at cost if they go down. This practice has resulted in trillions of yen in unreported losses. This is the reason why you will be reading more and more about arrests and criminal prosecutions in Japan.
However, Sherwin did not do that. He did the opposite. Sherwin was the customer. He guaranteed the broker, Jefferies, against loss.
While there is no New York Stock Exchange rule against this, this sort of agreement could be thought of as falling under the general umbrella of "price fixing" or "pegging" the market in securities. However, this is one of the problems of the federal securities laws and the rules and regulations promulgated thereunder. There are a lot of rules against "price fixing", "pegging the market" and "market manipulation" by "boiler rooms". However, nobody can agree on what these terms mean. One is reminded of the United States Supreme Court Justice who was asked to define pornography and who replied "I can't tell you what pornography is, but I can tell you that know it when I see it." Similarly, the S.E.C. has never precisely defined "market manipulation", but claims to know it when they see it.
In this case, the violation, assuming that there was one, was minor and trivial. Sherwin had never paid Jefferies the $40,000. He had merely promised to do so. Neither the public nor anybody else suffered any loss over this, except perhaps Jefferies, who was hardly a sympathetic figure. Ironically, had Sherwin sent the check to Jefferies, he would never have been prosecuted. Also, had he not cut the check, he would probably not have been prosecuted either.
The case of James T. Sherwin had a tragic end. GAF Corp. spent over a million dollars defending Sherwin. Sherwin was convicted and sentenced to six months, but his conviction was reversed on appeal on the ground that he had been denied the opportunity to present his defense to the jury. Sherwin lost his job of chief executive at GAF Corp. Sherwin also thrown out as President of the American Chess Foundation. Sherwin left the United States altogether and is now living in exile in Switzerland.
Jefferies, by testifying against Sherwin, escaped federal indictment and went back into the securities business. Jefferies is still operating a stock brokerage firm today.
The United States Attorney who prosecuted Sherwin was Rudi Giuliani. Giuliani is now the Mayor of New York City.
Sherwin still plays chess occasionally.
Sam Sloan
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